The Consumer Price Index (CPI) and the Producer Price Index (PPI) are important economic indicators that people pay attention to. Both are released by the U.S. Bureau of Labor Statistics (BLS) and measure price changes for goods and services related to inflation. However, they differ significantly in the types of goods and services they focus on and the kinds of prices they collect for those items.
The differences are there because the two indexes show different parts of economic activity. The PPI helps measure real growth by adjusting income for inflation, while the CPI is used to figure out cost of living adjustments (COLAs) by adjusting both income and expenses. Find out more about how PPI and CPI differ and their purposes.
Key Differences
| CPI | PPI | |
|---|---|---|
| What it measures | Average change in price of consumer goods and services | Average change in sale prices of domestic goods and services for consumers and businesses |
| Composition | All goods and services purchased by urban households, including imports | All output of U.S. producers, not including imports |
| Prices | Out-of-pocket expenditure, including taxes | Revenue received by the producer, not including taxes |
The CPI is a key measure of inflation. It tracks how the prices of a group of consumer goods and services change over time. When prices go up, people tend to buy less, which can increase inflation. This situation often results in changes to income and living costs.
The prices gathered for the goods and services in the PPI are different from those in the CPI. The PPI looks at the money producers earn, so it does not count sales and excise taxes in the price since these taxes are not part of the producer’s income. On the other hand, the CPI includes sales and excise taxes because they influence the prices that consumers pay, affecting how much they spend.
The PPI is an early sign of changes in the CPI. When producers experience higher costs for materials, they pass these costs on to retailers and consumers. Additionally, the PPI accurately reflects production levels since it is not influenced by what consumers want.
Relationship Between CPI and PPI
The PPI is an early sign of changes in the CPI. When producers face higher prices, shown by the PPI, they usually pass those costs to consumers, which the CPI measures.
Conclusion
The CPI and PPI are key signs of inflation. By following these reports and understanding that the Fed usually raises interest rates to fight inflation, you can make smart choices with your money.